Portfolio theory suggests that investors should spead their investment risks over different classes of assets that are not correlated in a similar fashion. A loss in one asset class can be mitigated by gain in another asset class.
My asset allocation as at end of last month was:
|Structured deposits with banks||8.2|
|Preference shares of local banks||22.7|
|Retail bonds traded on Singapore Exchange||3.3|
|Unit trusts – equity and bonds funds||16.8|
On an overall basis, the market value of total portfolio was 0.95% below costs. But on an individual asset class basis, some asset class was 9% below while others were in positive territory. The spread into different asset classes helped to cushion the negative impact of some investments.
As one gets into retirement, it might be better to consider increasing investment into fixed income instruments to get a constant stream of income. Some preference shares of local banks offer returns that are about 3% to 4% (depending on investment cost when one first bought into the preference shares). Assessing risk of preference shares collapsing is necessary before one puts money into them.
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